Section 34 of the Arbitration Act: Prospective but RetrospectiveMay 9 2019
In a significant decision on the interpretation of the Arbitration and Conciliation Act, 1996 (the “Act”), the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), Civil Appeal No. 4779 of 2019 has held that amendments introduced to Section 34 of the Act with effect from 23 October 2015 will apply to all Section 34 applications filed after October 23, 2015, even if the underlying arbitration itself was commenced prior to the amendment. In doing so, the Supreme Court has, without detailed reasoning, given the amendment very significant retrospective effect – even though the stated intent of the decision was to make the amendments only prospective.
The Court has also reignited the debate on dissenting opinion in arbitrations by setting aside a majority Award while elevating a minority decision to the status of an Award. The Court has exercised its extraordinary constitutional powers under Article 142 of the Constitution of India in doing so.
The Appellant entered into a contract with the Respondent for the construction of a four-lane bypass in the State of Madhya Pradesh. The contract provided for a price adjustment mechanism for components such as cement, steel, plant and machinery etc. by reference to the Wholesale Price Index (“WPI”) of the 1993-94 = 100 (“Old Series”). However, with effect from September 14, 2010, WPI for the Old Series was replaced by indices under the WPI series 2004-05 = 100 (“New Series”). The respondent issued a circular (“Circular”) in which a new formula for determining indices was used by applying a linking factor between the New Series and the Old Series.
The crux of the dispute between the parties was whether the Respondent could make payments to the Appellant by reference to the Circular, or whether it was required to continue to apply the price adjustment mechanism as stipulated in the Contract.
A three-member arbitral tribunal constituted to hear the claims ruled by a majority that the Circular was not inconsistent with the terms of the Contract and therefore permitted payments to be made by reference to the Circular. While doing so, the majority award applied certain government guidelines of the Ministry of Commerce and Industry (which were not on record), as per which it was stated that the establishment of a linking factor to connect the Old Series with the New Series is imperative, and therefore, required. One of the arbitrators gave a dissenting opinion, and held that the price adjustment mechanism as contained in the Contract cannot be overridden by a Circular.
In proceedings under Section 34 of the Act, a single judge of the Delhi High Court held that while he preferred the interpretation given by the dissenting arbitrator, the view of the majority was a plausible one and therefore did not warrant any interference. A Division Bench of the Delhi High Court also came to a similar conclusion in proceedings under Section 37 of the Act. Aggrieved by this, the Appellant approached the Supreme Court.
Decision of the Supreme Court
Applicability of the Amended Act
The arbitration under question was initiated before the coming into force of the amendments to the Act on October 23, 2015, but proceedings under Section 34 of the Act were initiated subsequent to the amendments. The question therefore arose as to whether the court should apply the Act as amended, or as it existed previously.
The court noted that radical changes had been made to the Act during the amendments in October 23, 2015, in particular on the interpretation of the term “public policy of India”. It referred to its earlier decision in Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287, wherein it was stated that
“Section 26 of the Amendment Act makes it clear that the Amendment Act, as a whole, is prospective in nature. Thereafter, whether certain provisions are clarificatory, declaratory or procedural and, therefore, retrospective, is a separate and independent enquiry.”
The Court then found that although certain amendments to Section 34 of the Act were stated to be merely clarificatory (Explanation 1 and 2), they were in effect substantive changes. Specifically, the court found that fundamental changes have been made in the law by virtue of these amendments, including by doing away with the expansive interpretation to the terms “public policy of India” as interpreted in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 and ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263.
Since the amendments were substantive, the court found that Section 34, as amended would be prospective. By prospective the court means: the amendments would apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date. In the present case, since the Section 34 application was filed after the amendments, the Act as amended in 2015 was held to be applicable.
Decision on the facts of the case
On facts, the court held that since the majority award of the Tribunal relied on material i.e. guidelines of the Ministry of Commerce and Industry which neither party had relied on or produced as part of the arbitration, the Appellant had been denied an opportunity to comment on these guidelines, and therefore to fully present its case.
The Court also held that a finding by a Tribunal on an issue squarely before it (here the argument was that the Award amounted to creating a new contract between the parties), even if based on an interpretation that wanders out of the scope of the contract, cannot be said to be a decision outside the scope of the arbitration agreement.
The Court also held that the interpretation adopted by the majority of the Tribunal in their Award of applying the Circular in place of the Contract amounted to the Tribunal rewriting the Contract. The Court found that this would be contrary to the most basic notions of justice.
Accordingly, the Court set aside the Award. The Court noted that normally the matter would have to be remanded to the Tribunal for fresh consideration. However, in the interests of speedy resolution of disputes, invoking the extraordinary powers vested in the Supreme Court by virtue of Art. 142 of the Constitution, the Court upheld the minority award as being the award that would bind the parties.
At the outset, the Court’s characterization of the amendments to Section 34 as prospective is wholly misleading. The amendments have been held to apply to court proceedings initiated after October 23, 2015 even in respect of arbitrations which were commenced prior to the amendments. This clearly makes the amendments retrospective.
Largely flowing from this mischaracterization, the Court’s decision on this issue is devoid of crucial reasoning. For instance, the Court has failed to grapple with the question of whether the rights available under Section 34 of the Act as were available to the parties at the time of initiating arbitration were vested rights? Could such rights be taken away from parties without an express retrospective legislation? The absence of any discussion on this issue is particularly surprising given the importance given to this aspect in BCCI v Kochi (supra) while considering the question of prospectivity.
The Court’s eventual decision of upholding a minority award raises interesting issues. The position of law in recent times has been that an award that has been set aside must be remitted to an arbitral tribunal for fresh consideration. This has been in recognition of the principle of party autonomy and with the aim of reducing judicial interference.
However, where arbitral awards have languished in courts for several years, this approach had the potential of doing more harm than good. The Supreme Court’s approach appears to draw a balance between party autonomy and efficiency. by restricting this power to Article 142 of the Constitution, the Court has ensured that party autonomy is not completely eroded. Further, the decision is also likely to encourage well-reasoned dissenting opinions.
The author is a lawyer working at Keystone Partners.
Read the Supreme Court’s judgment in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India:Ssangyong Engg v NHAI - SC - May 2019
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